Following more than four years of investigation, the U.S. Department of the Commerce’s Bureau of Industry and Security (“BIS”) added ZTE Corporation (“ZTE”) and three of its affiliates to BIS’s Entity List, thus subjecting it to certain onerous licensing requirements. ZTE was found to have engaged in the re-export of U.S.-origin items to Iran in violation of existing U.S. sanctions regulations. According to ZTE documents published by BIS, the re-export of such U.S.-origin items was both systematic and organized in such a manner as to deliberately conceal the nature of the prohibited transactions.

ZTE’s inclusion on the Entity List means that all persons and companies seeking to export, re-export, or otherwise transfer items subject to the Export Administration Regulations (“EAR”) to ZTE will now have to apply for a license to do so. Moreover, such license will be reviewed by BIS under a presumption of denial – meaning, that BIS is unlikely to license such transfer of U.S.-origin items. This licensing restriction thus threatens to inflict lasting harm to ZTE as a significant portion of its suppliers are from the United States or otherwise dealing in U.S.-origin goods or technology. It will likely be difficult for ZTE to find alternative suppliers that are not dealing in foreign-made products that contain more than de minimis amount of U.S.-origin items.

The Chinese government quickly registered its stern disapproval of the U.S. measures, stating that it had “expresse[d] its strong dissatisfaction and resolute opposition” to the new U.S. restrictions. China’s statement admitted that the “U.S. move will severely affect normal operations of Chinese companies,” and that “China will continue negotiating with the U.S. side on this issue.” Meanwhile, ZTE noted that it itself was cooperating with U.S. authorities in every way possible to resolve the matter and had been in close communication with the U.S. government.

Interestingly, there is no sign yet that OFAC will take action. Pursuant to 31 C.F.R. § 560.205, the re-export from a third country by a non-U.S. person of U.S.-origin goods, technology, or services is prohibited if undertaken with knowledge or reason to know that the re-exportation is intended specifically for Iran and the exportation of such items from the U.S. to Iran is subject to export license application requirements. Based on the facts as alleged in BIS’s notice, there is an obvious case to be made that ZTE’s activities constituted a blatant violation of 31 C.F.R. § 560.205, as well as 31 C.F.R. § 560.203 (conspiracy and evasion). Indeed, some reports note that ZTE executives had refrained from travel to the United States over the past few years out of fear of being the subject of a criminal prosecution for the potential sanctions violations.

Nonetheless, OFAC was apparently not part of the investigation into ZTE’s activities leading up to last week’s announcement. Those parties publicly revealed to have been involved included the U.S. Department of Commerce, the U.S. Department of Justice’s Federal Bureau of Investigations, and the U.S. Department of Homeland Security.

It is important to remember, though, that the U.S. government has a range of tools to use to enforce and administer its export-control and sanctions regulations. As this case demonstrates, imposing certain onerous licensing requirements for all persons or companies seeking to export, re-export, or otherwise transfer items subject to the EAR can be even more draconian a penalty than a mere civil fine or even a threat of criminal prosecution: ZTE is critically reliant on access to U.S.-origin goods and technology in order to sustain its business model. By restricting the transfer of U.S.-origin items to ZTE via such a licensing procedure, U.S. authorities have reprimanded the Chinese firm in a manner that they (and others) are not likely to forget.